Competition a squeeze on insurance margins

Stiff competition is restricting commercial insurers from offsetting higher reinsurance costs, making a margin squeeze inevitable for Australian and New Zealand players.

The assessment by Credit Suisse analysts comes as the world’s largest reinsurer, Munich Re, said the accumulation of natural catastrophes had made 2011 the highest loss year on record after just the first six months, with an estimated losses of $US265 billion ($251 billion) to the end of June.

Reinsurers are passing costs onto insurers, which must recoup these by raising customer premiums.

Industry executives note the im­pact of disasters is regionalised in terms of repricing and restricted to certain classes, such as the catas­trophe-hit property insurance businesses within Australia.

Capital levels for commercial insurers also remain healthy, with competition for market share restricting their ability to raise premiums.

Credit Suisse analyst John Heag­erty told clients: “In the lead-up to each renewal, we hear the market is hardening and rates are set to rise, but once again competition for market share appears to have prevented any significant [premium] rises."

He noted that for
Suncorp
and
Insurance Australia Group
’s commercial portfolios, a premium in­crease of around 5 per cent was needed simply to offset reinsurance costs and maintain profit levels.

“We note that current profit levels are below management targets and hence even maintaining current levels of profitability will be challenging," Mr Heagerty said.

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By contrast, Suncorp earlier pointed to average growth of 8.8 per cent in its home insurance gross written premium and 4.6 per cent growth for its motor insurance business. Australia’s commercial insurance market is split between QBE, Suncorp, IAG, Zurich, Allianz, Wesfarmers and smaller players.

Mr Heagerty said, “We consider it inevitable that New Zealand and Australian commercial lines margins will contract in the next 12 months, possibly longer."

Wesfarmers insurance managing director Rob Scott has warned of a margin squeeze in the coming year while QBE chief
Frank O’Halloran
has predicted a bad US hurricane season could trigger a rise in global commercial premiums.